How would a real estate crash affect house prices?

Homebuilder sentiment comes from a monthly survey conducted by the NAHB and the Wells Fargo Housing Market Index. The survey asks over 140,000 members about the situation in the housing industry. The recent reading of 49 marks the first time since May 2020 that the index has fallen above the 50 level, the breakeven figure.

It is also estimated that the US housing shortage is up to four million homes, with new homes taking up to eight months or more to build. That is the case compared to up to six months before the pandemic.

Does a recession reduce housing costs?

In theory, a recession should lower housing costs, but that’s not always the case. The currently drastically undersold real estate market means that real estate prices remain largely unaffected by certain contractionary forces. This is currently the case even on the precipice of a major economic downturn.

Home prices continued their upward trend for most of 2022, even as mortgage rates rose 4% from January through March. The average house price in the United States increased by 21% from the first quarter of 2021 to the first quarter of 2022. In fact, mortgage rates are nearing their highest levels since 2008. Ultimately, house prices are likely to feel the effects of an unfriendly seller’s market, particularly if mortgage rates continue to spike as predicted in response to the US Federal Reserve’s spate of rate hikes.

Given these economic conditions, it remains to be seen whether this will slow the current acceleration or lead to falling home prices in the end.

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